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Why do well-to-do companies fail ?

In recent times, I was reading a review of the book “Serial Innovators – The firms that changed the world” by Claudio Feser, Director, Mckinsey & co. : where he talks about the need of serial innovators in the corporate world and presents several tips on survival. Interestingly, he talks about ‘Creative destruction’ (a paradoxical term?) here in his book and reminds us of how legendary companies are going bankrupt and getting gobbled up by the competition. Yes, emerging markets are globalized now; at least in India it is ! No company can rest on past laurels and cool their heels. In fact, neither can an individual in a fast-paced company do too. So, What is the market requirement or what is needed to adapt to new market conditions, then? Why do leading well-to-do companies fail? How is that companies fail after reaching a ‘seemingly’ irreversible state of success.

Claudio writes, “Firms die when they develop organizational rigidity that prevent them from adapting to dynamic markets. Companies that succeed in their early years get locked into mental models. They codify their success through rigid organizational constructs such as hierarchy and standard operating procedures (sic!). It unfolds like a natural biological process like cell death in organisms, but the rigidity are actually man-made. They originate in the human brain and in organizational constructs made of human beings.”

Yeah! Anyhow, I am coming to that. About a year and half back, the well-to-do profit making HP Printer supplies division in Kores India closed shop. I was not even aware of it’s closure since I was abroad and really I never thought that something like that could happen. Incidentally, I was part of the core team that started this division from the scratch in the year 1998 and took it to No.2 position among the distributors in Mumbai by the year 2002 despite strong competitors and then I quit to pursue something else of different interest. So, I was naturally shocked, puzzled and disappointed to learn this news. I asked myself, How can a well-to-do profit making division close shop?

I am compelled to assume that organizational rigidity was the main reason and it was in the promoter’s mind. But then, the rigidity was always part of the management and organizational culture in Kores India. Such a rigid approach has its own advantages (or merits) as well as its failings. In olden days, about 50 years ago, most companies believed in ‘bottom-line’ growth (read as profit margin), but that has totally changed now ! With growing globalization and emergence of free markets in India, there are really too many players in every field or industry vertical – whether it is service and/ or product determined. Hence now, the focus has shifted to building better ‘top-line’ sales turnover to gather greater market share and earn more revenues for the company. This top-line growth policy to build increased sales turnover is actually a fall-out of the present market conditions and severe price competition. But, building higher sales turnover involves more deployment of funds into business activity, better control of inventory and payment receivables. Also it calls for better awareness of the market you operate in and timely responsiveness to dynamic market conditions. In such market situations, companies cannot be rigid in their thoughts as well as actions. And in Kores India, the rigidity in individual’s mind and consequently in the organization’s mind led to closure of a well-to-do promising business option. No explanation was required to be given to me. It is a management decision! Period.

If individuals have in-built rigidity in their minds, so do organizations have. As firms grow bigger and become multiple-layered as well as complex, bureaucracy looms large with inefficiency setting in. Such Organizations will react late or react slower to the ‘rapid’ changes in the market conditions. In addition, in some companies, the management or the policy/ decision makers live in the ‘proverbial Ivory Towers’. Most of the times, the decision makers are cocooned into their plush ‘comfy’ cabins by the surrounding self-serving group of executives. Market reality is thrown far away from the sight of the management and made invisible to them. In such organizations, most employees lose their sense of purpose. Need I say anything more?